The Social Mood Phenomenon

When the protests that have been subsumed under the 'Occupy Wall Street' header began to spread and make waves, we took a closer look and decided we'd probably write about the phenomenon. After all, they are an expression of the deterioration in the 'social mood' that as a rule accompanies bear markets and secular economic contractions.

As you will see below we are not accepting the major premise of the social mood theory uncritically, but there are some aspects of it that we find quite fascinating.

To quickly recapitulate the 'social mood' idea: this term was originally (as far as we know) coined by Robert Prechter, who tried to find out what 'really' moves financial markets, especially the stock market. It was an idea waiting to be discovered, based on the fact that it can be shown that what is usually held to move the market – this is to say, the explanations forwarded by the media on a daily basis – often does not seem to have a discernible causal relationship to what is actually happening. Quite often the same causal factor is cited as having  opposite effects, such as the famous headlines at Bloomberg on two successive days in 2005 (or 2006, we're not entirely sure of the time) that alternately claimed that rising oil prices were pushing the stock market higher while  blaming them for driving  it lower the very next day.

To this we would say: what is really revealed by these contradictory headlines is that it is not possible to discover causality in the economy and markets by means of empiricism. After all, the seemingly contradictory headlines at Bloomberg were not 'wrong' in the strict sense of the word – rather, they were incomplete.

At any given point in time, so many different factors influence the appraisal of the future exercised by speculators and entrepreneurs that it is simply not possible to claim that a single factor 'caused' this or that movement in prices.

To give an example elucidating this further: anyone who has been observing the financial markets over a long time span knows that the market has alternately obsessed over different data points over time.

In the late 1970's to early 1980's, the release of the latest money supply data was expected with bated breath every week. Today, no-one cares about them anymore. Then the trade deficit became the center of attention for a while (for a long time it's inexorable rise was deemed a negative), a report that today is met with a shrug. However, one report has always been a big focus, namely the monthly payrolls data. Before continuing, we should mention why all these reports of economic data received so much attention: the reason is that they were (rightly) held to greatly influence the degree of government intervention in the markets.

The employment report holds a special place in the  flood of economic data, as lowering unemployment is part of the Fed's dual mandate. It is not relevant that it can not possibly create a single sustainable job by means of manipulating interest rates and the money supply – what counts is that most of the bureaucrats manning it believe it can, and have a mandate to act accordingly.

During the bull market of the 1980's to 1990's, the markets always wanted 'weak' payrolls data. The reason for this was that it was widely held that the Greenspan Fed would be more likely to stay 'easy' if unemployment didn't contract too quickly. 

Over time this has changed. Today, a weak payrolls report is generally greeted with selling in the stock market. The Fed is already pursuing an extremely easy monetary policy, and seemingly to no effect (at least no effect in the sense of reviving economic activity). There is little point seen in it easing its policy further by extraordinary means (beyond the short term) – instead, investors crave a recovering economy. Lower interest rates – once regarded as an unequivocally bullish datum – are now seen as a symptom of the contraction. Not surprisingly, after the secular bull market's 'orthodox top' was reached in 2000, the stock market's one major rally phase from 2002 to 2007 was accompanied by rising, not falling interest rates. 

In other words, we can indeed come to some conclusions as to why there was once a time when weak payrolls data provoked rising stock prices and why today weak payrolls reports are seen as a negative for stocks. We only have to look at the larger context. However, we are still not able to use this 'general observation' to make firm predictions about any given day. For instance, the last payrolls report was 'better than expected' – but it was still a bad report. The market initially rose upon its release, but this could well have happened because the market has already discounted negative outcomes to some extent (whether this discounting is sufficient is another matter – we think it isn't).

In short, even knowing on a general level why weak jobs data have alternately been seen as 'good' and 'bad' for stocks, we can not forecast the market action on the day the data are released based on a simple 'if-then' formula. The complexity of the market continues to stand in the way of such a simplistic approach.

In any event, let us come back to Bob Prechter's theory. Prechter not only asked 'why do markets seemingly react in a random manner to the news of the day', he also wondered why the stock market often becomes seemingly 'irrational'. This irrationality can easily be demonstrated by considering the precepts of value investing and how they are sometimes thwarted.

No value investor would ever have touched an internet stock in the 1990's. There were no positive cash flows to measure and discount (only 'fantasy figures'), there were no assets that appeared undervalued: in fact most of these companies looked vaguely like Ponzi schemes that relied on a steady stream of capital raisings to survive. This was in most cases the correct long run assessment (cue:, 'Webvan', 'Verticalnet' and many other companies that have disappeared), but by the time most rational observers had concluded that most of these stocks would eventually be 'zeroes', the biggest gains in them were yet to come. The mania in technology shares went to extremes that no superlatives can adequately convey. We still recall the time February-March 2000, when we incredulously noted that 92% of all assets in the Rydex fund family were deployed in bullish and sector funds, most of it in technology, with the Nasdaq's p/e ratio approaching 300 (if one left out the money losing enterprises that is).

In this case, value investors who refused to play the bubble let an incredible opportunity to make enormous profits pass them by, as so-called 'value stocks' languished and were in fact going lower concurrently. They were vindicated after the tech bubble burst and the bubble in 'value stocks' began. We recall a number of value oriented investors capitulating in the months leading to the top, either by buying into the mania at exactly the wrong moment or by closing down their funds.

The opposite type of 'irrationality' can be observed near the lows of long lasting secular bear markets. Once again, value investors tend to be stymied by the market's seeming refusal to see what it obvious to them: there is plenty of value. We know of stocks in the Japanese market that have traded below the net cash on their balance sheets for years. A famous value investor, Jim Grant (who writes 'Grant's Interest Rate Observer') has given up on Japan a while ago already, after trying in vain for some time to make money from this incidence of mispricing.

This brings us back to Bob Prechter, who concluded from observing these seemingly irrational episodes in securities prices that 'fundamental data do not drive the stock market'. On the contrary, so Prechter, the 'normal economic relationship between demand and supply is stood on its head'. Normally, lower prices will lead (ceteris paribus) to a rise in demand for a good, while higher prices will lead to a decline in demand. In stocks, so Prechter, this seems to work the other way around: rising prices lead to even more demand for stocks, while lower prices are diminishing demand. One of the reasons why he came to this conclusion is the fact that trading volume tends to surge in bull markets over time, while it declines in long term bear markets. Obviously though, there  must be a seller for every buyer, so this view is a bit flawed. It is probably the case that the reservation demand of current holders of stocks near the low of secular bear markets at the then prevailing prices contributes to the decline in trading volume. Obviously, near major market lows, most stocks have already moved from 'weak' to 'strong' hands.

Once again, the ceteris are never paribus in the real world. As we have often noted in the past, economic theory can be elucidated by creating artificial constructs such as an economy in 'equilibrium', for example either a static or an evenly rotating economy – but these are merely hypothetical states in which certain aspects of the real world of dynamic market processes are subtracted in order to see how things would work in their absence, so that one can then work out step by step how things work in reality.

In order to understand Prechter's line of thought, one must consider his starting point – namely, the Elliott Wave Principle, originally conceived to analyze the fractal wave shapes that can be observed in price movements in the stock market. He noted (although this is not indisputable) that 'the wave principle works regardless of the fundamental backdrop' and in combination with the observations about the often irrational prices of stocks at the extremes of secular trends, concluded that the stock market is driven by an endogenous force, a force he then further concluded drives all major trends in society. He named it the 'social mood'. In effect this is a variation on behavioral finance theories that consider the so-called 'herding effects' in the stock market.

We have previously mentioned Nelson Hultberg's critique of this idea, which we want to briefly repeat here:

“Investor mood moves the market and determines the wave patterns that prices take. But what is it that causes the psychological mood of the investing public? It is not a given. It doesn't exist as a primary. Investor mood is caused by something. In my opinion (and in the opinion of a whole bevy of highly astute analytical minds going back many decades), investor mood is brought about by a myriad of fundamentals acting upon the human minds that comprise the marketplace. It is the summation of all these various fundamentals in the millions of investor minds every day (supply and demand, corporate earnings, monetary growth, Fed policy, wars, tragic events, corruption, debt overload, etc.) that determines the mood of the investing public. This psychological mood does indeed form waves, and therefore it can be charted. But it is not primary! It is derivative. That is to say it is derived from the fundamentals that comprise everyday life.

According to Prechterian theory, though, it is just the other way around. As Prechter sees it, fundamentals are brought about by the "psychological mood" of the public. Thus, Elliott practitioners' insistence on charting this mood via wave analysis. They maintain that they are tapping into the primary force of the market with their wave counts, and that this will lead one to the best possible forecast for future price movements.

But if this is so, then they still have to answer the question, what causes this psychological mood? And once that cause is identified, would it not then be the real "primary" force to tap into? All phenomena of the universe are caused by something. They do not exist axiomatically. They are brought about by preceding causes. This is basic science — cause and effect. It extends to all phenomena of the universe. Therefore, Prechterian theory is flawed in that it appears to consider "psychological mood" as a given and does not try to explain it's origin.

Traditional fundamental analysis, on the other hand, does explain the origin of the investing public's psychological mood. It does not consider it to be a given. Investor mood is brought about by the vast coalescence of fundamentals in the minds of millions of investors that make up the marketplace. Investors then bid prices up or down depending upon the mood that results from their interpretation of these fundamentals. Are the fundamentals then primary? No. They are caused by human action guided by all the various drives of human nature – ambition, love, power lust, greed, security, etc. Investor mood moves the market, but it is fourth in the cause and effect chain. For example:

Human nature [creates] human action [which creates] fundamentals [which create] investor mood [which creates] price direction.”

Nevertheless, Bob Prechter's attempt to track down the effects of the 'social mood' phenomenon outside of the stock market has led to a number of startling discoveries. For instance, he found out that certain cultural and political trends are undeniably correlated with the primary trend of the stock market. We tend to think that there is in fact a kind of 'feedback loop' at work: once a secular bust is underway, falling stock prices cause a change peoples' attitudes, and the change in attitudes in turn causes stock prices to decline further. 

To name an interesting example, Prechter's studies revealed that for instance the colors of cars and the horse power of their engines are correlated with the direction of stock prices. During secular bear markets, 'conservatism' gains ground. The best selling colors are dull, drab, unobtrusive ones, like brown or  gray. The demand for high powered engines declines as well. People begin to prefer inconspicuous transportation. During the bull market however, it is 'party time' everywhere, and that can be seen even in terms of which types of cars are preferred. The best selling colors are conspicuous and bright ones, like for instance red. People not only want their cars to be seen, they want them to be fast and strong as well – the horse power of engines tends to increase.

Prechter also found out that there is a correlation between the direction of stock prices and the desire to procreate. The 'baby boom' of the 1960's came on the heels of a major third wave up in the prices of stocks and the growing prosperity associated with the bull market.

For purposes of analyzing the growing political protest movements such as the Tea Party and its equivalent on the left, the 'Occupy Wall Street' demonstrators, the relevant discovery is that bear markets tend to be accompanied by a splintering of society into smaller groups and growing disharmony, as opposed to the often large-scale 'inclusionary' and cooperative efforts observed during bull markets.

The birth of the euro right at the top of a several decades long bull market is a typical example for the latter – indeed, in spite of the fact that a great many economists warned at the time of its introduction that the euro was conceptually flawed and would be unlikely to work, its proponents were convinced it would be possible to 'make it work'. It was the social mood of the day that drove the fantastic idea that a single fiat money and a fractionally reserved banking system could actually work across the boundaries of such disparate economies (as Robert Murphy correctly notes here, if the euro were fully backed by gold, then it could not possibly be threatened by the insolvency of a few nation states using it; alas, its fiat money character means that is indeed threatened).

The great danger of this growing disharmony and splintering of society during phases of deteriorating social mood is that the often well founded protests are hijacked by political forces that end up replacing the existing system with something even worse – such as e.g. happened in the 1930's in Europe. As it were, at the end of secular economic  contractions we often see large scale wars break out – the ultimate expression of social disharmony if you will.  


Occupy Wall Street – The 'Tea Party With Brains'?

Initially we thought we would be likely to either give a thoroughly negative assessment of the OWS movement, or not express a value judgment at all (i.e., we would only mention it in passing as an example of the souring social mood). Unfortunately for the most part our assessment is indeed a negative one.  We are in principle very partial to any protest movement that takes aim at the existing state-capitalistic establishment, but we were and still are very worried by the pro-statism and socialistic slant of the movement's demands.

Initially, the movement apparently didn't have any concrete demands.  Below is an example of the levity accompanying the protest at first, with the activists evidently not taking themselves too seriously. They are chanting: 'What do we want? We're not really sure! When do we want it? NOW!'





David Weidner wrote a piece on the movement entitled 'OWS – the Tea Party with Brains' (please note that the article's title is only visible in the URL – the editors at Marketwatch have in the meantime altered the title).

What apparently causes this differentiation between allegedly 'brainless' (Tea Party) and 'brainy' (OWS) protesters is that the latter are leftists and the former a mixture of libertarians and conservatives.

As it were, a list of thirteen proposed demands has been drawn up by the movement in the meantime, which can be reviewed here. Of course these may not speak for everyone involved. In fact, we rather doubt it – it is probably too broad a church. Alas, the demands have been listed by the movement's main organizers.

These are the demands:

“Demand one:

Restoration of the living wage. This demand can only be met by ending "Freetrade" by re-imposing trade tariffs on all imported goods entering the American market to level the playing field for domestic family farming and domestic manufacturing as most nations that are dumping cheap products onto the American market have radical wage and environmental regulation advantages. Another policy that must be instituted is raise the minimum wage to twenty dollars an hr.

Demand two:

Institute a universal single payer healthcare system. To do this all private insurers must be banned from the healthcare market as their only effect on the health of patients is to take money away from doctors, nurses and hospitals preventing them from doing their jobs and hand that money to wall st. investors.

Demand three:

Guaranteed living wage income regardless of employment.

Demand four:

Free college education.

Demand five:

Begin a fast track process to bring the fossil fuel economy to an end while at the same bringing the alternative energy economy up to energy demand.

Demand six:

One trillion dollars in infrastructure (Water, Sewer, Rail, Roads and Bridges and Electrical Grid) spending now.

Demand seven:

One trillion dollars in ecological restoration planting forests, reestablishing wetlands and the natural flow of river systems and decommissioning of all of America's nuclear power plants.

Demand eight:

Racial and gender equal rights amendment.

Demand nine:

Open borders migration. anyone can travel anywhere to work and live.

Demand ten:

Bring American elections up to international standards of a paper ballot precinct counted and recounted in front of an independent and party observers system.

Demand eleven:

Immediate across the board debt forgiveness for all. Debt forgiveness of sovereign debt, commercial loans, home mortgages, home equity loans, credit card debt, student loans and personal loans now! All debt must be stricken from the "Books." World Bank Loans to all Nations, Bank to Bank Debt and all Bonds and Margin Call Debt in the stock market including all Derivatives or Credit Default Swaps, all 65 trillion dollars of them must also be stricken from the "Books." And I don't mean debt that is in default, I mean all debt on the entire planet period.

Demand twelve:

Outlaw all credit reporting agencies.

Demand thirteen:

Allow all workers to sign a ballot at any time during a union organizing campaign or at any time that represents their yeah or nay to having a union represent them in collective bargaining or to form a union.”

We're sorry, but we have to say that we can not possibly support the great bulk of these demands, even though we think there is indeed ample reason to protest against the establishment. Most of the demands have one thing in common: they are a call for authoritarianism of a socialist bent. Meeting them would essentially require employment the State's powers of coercion and compulsion to their full extent in order to trample the rights of individuals, specifically their property rights, with impunity. Not surprisingly, president Obama declared himself sympathetic to the movement, as reported here.

Many of the demands reveal a disturbing degree of economic illiteracy to boot. Let us for instance consider the first demand.

Admittedly, we do not have 'free trade', but rather 'managed trade', guided by the long refuted ideas of mercantilism on the part of many nations. Alas, the populist demand for protectionism always has and always will be inviting economic disaster. It is a demand that refuses to see the other side of the coin. Trade is not 'between nations' – it is between individuals. It is voluntary and it would not take place if not both parties to a trade were gaining from it. What domestic producers lose in pricing advantage, consumers gain in the form of lower prices and rising living standards. Moreover, the money consumers save on account of being able to buy cheaper goods is then free for investment in other economic activities where a comparative advantage exists. It is not a coincidence that throughout history the richest places on earth were always the centers of free trade. If protectionism could bring about prosperity, then the most isolated villages in the Hindu Kush would today be utopias of riches envied by all. They obviously are anything but.

Arbitrarily raising the 'minimum wage' can only lead to a further increase in institutional unemployment. Already minimum wage laws create a residue of institutional unemployment that can never be overcome – it impoverishes all those whose labor is valued by the free market below the prevailing height of the minimum wage. These people are ceteris paribus condemned to unemployment forever. Raising the minimum wage will further increase the level of institutional unemployment. All those who have not been fortunate enough to enjoy a good education or have otherwise been able to raise the free market value of their labor services will pay the price.

As Ludwig von Mises wrote in Human Action on so-called 'pro-labor legislation' (we bring a big excerpt below, as this is highly relevant):

The interpretation of the evolution of modern industrialism has been utterly vitiated by the anti-capitalistic bias of governments and the masses and the allegedly pro-labor writers and historians. The rise in real wage rates, the shortening of hours of work, the elimination of child labor, and the restriction of the labor of married women, it is asserted, were the result of the interference of governments and labor unions and the pressure of public opinion aroused by humanitarian authors. But for this interference and pressure the entrepreneurs and capitalists would have retained for themselves all the advantages derived from the increase in capital investment and the consequent improvement in technological methods. The rise in the wage earners' standard of living was thus brought about at the expense of the "unearned'' income of capitalists, entrepreneurs, and landowners. It is highly desirable to continue these policies, benefiting the many at the sole expense of a few selfish exploiters, and to reduce more and more the unfair take of the propertied classes.

The incorrectness of this interpretation is obvious. All measures restricting the supply of labor directly or indirectly burden the capitalists as far as they increase the marginal productivity of labor and reduce the marginal productivity of the material factors of production. As they restrict the supply of labor without reducing the supply of capital, they increase the portion allotted to the wage earners out of the total net produce of the production effort. But this total net produce will drop too, and it depends on the specific data of each case whether the relatively greater quota of a smaller cake will be greater or smaller than the relatively smaller quota of a bigger cake. The rate of interest and profits are not directly affected by the shortening of the total supply of labor. The prices of material factors of production drop and wage rates per unit of the individual worker's performance (not necessarily also per capita of the workers employed) rise. The prices of the products rise too.

Whether all these changes result in an improvement or in a deterioration of the average wage earner's income is, as has been said, a question of fact in each instance. But our assumption that such measures do not affect the supply of material factors of production is impermissible. The shortening of the hours of work, the restriction of night work and of the employment of certain classes of people impair the utilization of a part of the equipment available and are tantamount to a drop in the supply of capital. The resulting intensification of the scarcity of capital goods may entirely undo the potential rise in the marginal productivity of labor as against the marginal productivity of capital goods.

If concomitantly with the compulsory shortening of the hours of work the authorities or the unions forbid any corresponding reduction in wage rates which the state of the market would require or if previously prevailing institutions prevent such a reduction, the effects appear which every attempt to keep wage rates at a height above the potential market rate brings about: institutional unemployment.

The history of capitalism as it has operated in the last two hundred years in the realm of Western civilization is the record of a steady rise in the wage earners' standard of living. The inherent mark of capitalism is that it is mass production for mass consumption directed by the most energetic and far-sighted individuals, unflaggingly aiming at improvement. Its driving force is the profit-motive the instrumentality of which forces the businessman constantly to provide the consumers with more, better, and cheaper amenities. An excess of profits over losses can appear only in a progressing economy and only to the extent to which the masses' standard of living improves. Thus capitalism is the system under which the keenest and most agile minds are driven to promote to the best of their abilities the welfare of the laggard many.”

and ibid:

“[…] it is capitalism, which has made the wage earner so prosperous that he is able to buy more leisure time for himself and his dependents. The nineteenth century's labor legislation by and large achieved nothing more than to provide a legal ratification for changes which the interplay of market factors had brought about previously. As far as it sometimes went ahead of industrial evolution, the quick advance in wealth soon made things right again. As far as the allegedly pro-labor laws decreed measures which were not merely the ratification of changes already effected or the anticipation of changes to be expected in the immediate future, they hurt the material interests of the workers.

The term "social gains" is utterly misleading. If the law forces workers who would prefer to work forty-eight hours a week not to give more than forty hours of work, or if it forces employers to incur certain expenses for the benefit of employees, it does not favor workers at the expense of employers. Whatever the provisions of a social security law may be, their incidence ultimately burdens the employee, not the employer.

They affect the amount of take-home wages; if they raise the price the employer has to pay for a unit of performance above the potential market rate, they create institutional unemployment. Social security does not enjoin upon the employers the obligation to expend more in buying labor. It imposes upon the wage earners a restriction concerning the spending of their total income. It curtails the worker's freedom to arrange his household according to his own decisions.

Whether such a system of social security is a good or a bad policy is essentially a political problem. One may try to justify it by declaring that the wage earners lack the insight and the moral strength to provide spontaneously for their own future. But then it is not easy to silence the voices of those who ask whether it is not paradoxical to entrust the nation's welfare to the decisions of voters whom the law itself considers incapable of managing their own affairs; whether it is not absurd to make those people supreme in the conduct of government who are manifestly in need of a guardian to prevent them from spending their own income foolishly. Is it reasonable to assign to wards the right to elect their guardians?

It is no accident that Germany, the country that inaugurated the social security system, was the cradle of both varieties of modern disparagement of democracy, the Marxian as well as the non-Marxian.


(emphasis added)

Then consider demand number eleven: 'Debt Forgiveness for All'.

It sounds seductive, especially given the fact that many of the nation's households are drowning in debt. However, such a broad sweep of 'debt forgiveness' would destroy the banking system overnight, as all its assets would become worthless. What then about the banking system's liabilities?

A large part of the liabilities of banks are represented by demand and savings deposits – all in all over eight trillion dollars. If the assets held by the banking system were destroyed in one fell swoop, then all those who have been prudent, who have not gone into debt up to their eyebrows but have instead accumulated savings, would lose it all.

In effect, irresponsible debt junkies would be saved on the backs of savers, which include the proverbial widows and orphans, whose fate the OWS movement apparently isn't overly worried about. As it were,  this process is already well underway on account of the inflationary policies of the Federal Reserve, which punish savers and depositors to enable the banks to rebuild their ravaged capital positions.  It is one thing though to protest against the depredations of the fractionally reserved banking system, which due to its ability to create money from thin air infringes on property rights on a grand scale. It is quite another to demand that irresponsible debtors should be bailed out by destroying the savings of the prudent. This is quite beside the point that the bulk of the deposits in the banking system in fact consists of uncovered money substitutes for which no money proper exists.

Moreover, destroying the banks' assets and the deposits of savers overnight would also bring the market economy's payments system to a screeching halt. ATM's would stop working; soon supermarket shelves would be bare and the world would go dark. It would no longer be possible for the members of OWS post lists of silly demands to the internet.

Similarly, demand twelve of 'outlawing all credit reporting agencies' would make lending an impossibly difficult business. The costs for borrowers would increase vastly as a result, as lenders would have to add a large risk premium to loans (this is beside the fact that universal debt forgiveness imposed by force of law would utterly destroy the lending business anyway). Note here that while we oppose inflationary credit from thin air, it would be nonsense to oppose credit as such – the lending out of savings is a perfectly legitimate business, without which the market economy's smooth functioning would become impossible.

There is a very big difference between the entirely legitimate demand that the shareholders and bondholders of failed banks should not be bailed out at the expense of tax payers and all users of the dollar (by means of inflationary policies) and demanding the utter destruction of all existing financial claims. The latter is not only dumb, it is callous. Where are the 'brains'?

Unfortunately such unreasonable and economically harmful demands are par for the course once an economic bust is underway.  As Ludwig von Mises observed in 'Human Action' on the effects of the boom's demise on people:

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the necessary collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.

Here, they say, are plants and farms whose capacity to produce is either not used at all or not to their full extent. Here are piles of unsalable commodities and hosts of unemployed workers. But here are also masses of people who would be lucky if they only could satisfy their wants more amply. All that is lacking is credit. Additional credit would enable the entrepreneurs to resume or to expand production. The unemployed would find jobs again and could buy the products. This reasoning seems plausible. Nonetheless it is utterly wrong.”


(emphasis added)

Demand number five – 'bringing the fossil fuel economy to an end' – is yet another demand that would guarantee economic contraction if it were met.  As amply demonstrated by the example of Solyndra, a business that can not exist unless subsidized by the government as a rule represents a colossal waste of scarce economic resources. The world isn't using fossil fuels because they are smelling so nice. It is using them because they are a competitive, economically viable source of energy. The best way to arrive at the Utopia of 'green energy' that OWS wants to achieve by employing the coercive powers of the State is to allow the free market to work unhindered. As soon as alternative energy sources become economically feasible – and there is no reason to believe that human ingenuity won't be able to eventually overcome the problems involved – the free market will provide them. Any intervention by government will not only worsen the economic crisis, it will hinder the development of alternative energy sources rather than further it, as there is no way for the bureaucrats to determine how resources should be allocated most effectively and efficiently in pursuit of this agenda.

Demand number six – 'One trillion dollars in infrastructure (Water, Sewer, Rail, Roads and Bridges and Electrical Grid) spending now' – may strike many people as sensible on the face of it. Isn't it well known that the nation's infrastructure is crumbling and that therefore spending to fix it would be a good thing? Here we must first ask, why is the infrastructure (roads, bridges, sewer systems and so forth) in such  a deplorable state? Who is responsible for building it and keeping it in shape? As far as we can tell, infrastructure has become a province of the government and its vast bureaucracies. Private interests are only allowed to provide infrastructure in certain areas, such as telecommunications. Now ask yourself: is anyone worried that the telecommunications infrastructure is crumbling? Best ask your new i-Phone 4, which will be able to talk to you.

Why anyone would think that more government spending on infrastructure would be a good thing is mysterious. In all likelihood we'd eventually get countless 'bridges to nowhere' a la Japan. The provision of infrastructure should be turned over to the free market in its entirety.

Note also, there are 'seen' and 'unseen' aspects to spending on infrastructure. After all, the $1 trillion in spending must be somehow paid for. The government doesn't possess a secret stash of economic resources it can bring to bear on the problem. This means that all the resources employed in such infrastructure spending must be withdrawn from other employments. Since the government can only take resources from the private sector, there will be fewer of them available for wealth creation elsewhere in the economy. It is not possible for the government or OWS to know where such resources would be employed best. The unreflected demand for 'more infrastructure spending' fails to consider this fact.

We would by the way agree with demands number nine and ten – alas, if borders were to become open, then it must be clear that the mere act of crossing the border does not entitle one to becoming a dependent of the welfare state.

All in all, we must therefore disagree with the more benign assessment of OWS by Paul Brodsky of QB Partners, which was published at the Big Picture. We normally agree with many of the views expressed by QB Partners Paul Brodsky and Lee Quaintance – we are certainly on the same page with them regarding their assessment of the current monetary system and the conclusions they have drawn with regards to the gold market.

Brodsky notes:

“The protesters on Wall Street shouldn’t be patronized. Though they may not be financial sophisticates and they don’t know how to articulate a coherent message, they are absolutely – unquestionably – intuitively correct in directing their protest against the banking system.

Conceptually and now practically, a fractionally-reserved lending system combined with an uncollateralized currency allows governments, central banks and private banks to issue infinite credit to themselves.”

We wish it were so, but this is evidently not what they are protesting. It is not enough, in our opinion, to assert that the protesters are 'incoherent, but intuitively correct'. Their incoherence is precisely the problem. Where in their list of demands is there even a mention of 'fractional reserve banking' and its infringements on property rights? Brodsky is correct in his brief description of the workings of the fractionally reserved system, but we simply don't see that as the main point the protesters are making. All they are saying is 'forgive all existing debts' – which as it stands is sheer lunacy, even though one must acknowledge that the fractionally reserved system has created money claims from thin air, setting into motion exchanges of 'nothing for something' and consumption without preceding production. This in turn has led to the consumption of so much capital that the economy finds itself in a major secular bust now. So the protesters are right to lay the blame at the feet of the system, but they are not properly identifying the problem, and due to this misdiagnosis their proposed 'solutions' are simply terrible (see the list of demands above).

Brodsky continues with an analysis that we agree with:

“So then we have very leveraged economies funded virtually overnight by our central banks. This is the point of criticality on which our real economies rely. So it’s easy to understand how and why our economies have become so leveraged. But why are protesters starting to gather?

A wage earner – whether he or she self-identifies as progressive or conservative – can no longer save his or her wage and hope to keep his or her purchasing power. Why? Because more money has to be created simply to service already outstanding debt. As the Fed has created more money since 2008, (and given the vast majority of it to creditor banks, not debtors), the purchasing power of a wage-earner’s dollar has diminished in terms of food, energy and other goods and services that do not require credit for consumption (i.e. nominal prices are rising at the supermarket and gas pump but home prices are falling). This is perfectly logical.

The real economy is now naturally compelled to de-lever. There are only two ways to de-lever: 1) let credit naturally deteriorate, or 2) print money. The numerator (debt) and denominator (base money) must be reduced. Money creation is far more socially and politically expedient because debt deterioration would mean rising unemployment and bankruptcies, not to mention bank asset deterioration. Money printing, on the other hand, promises to ease the burden of repaying private sector debt loads ONLY IF the new money reaches private sector debtors. So far the new money has only gone to the banking system.

There is a far more fundamental aspect to the workings of our monetary system that is also clearly inequitable. Our markets and economy are no longer producing capital (sustainable wealth and resources). Leverage has marginalized real growth. Further asset price increases can only be catalyzed by further credit or money growth – enough to turn de-leveraging into re-leveraging. A growing percentage of people in Europe and the US are discovering that the economy in which they are ostensibly participating has been serving at the pleasure of a very small class of professional leveragers. What protesters seem to intuit is that the banking system has all the power and that it is taking care of its own.

For those of you who self-identify as progressives, you should re-think your defense of the current system. Money printing is a terribly regressive tax on the working and middle classes. Those with higher incomes and access to credit remain able to maintain their demand for inelastic goods and services, as well as maintain their ability to service debts, while lower wage earners, those with less access to credit, and those losing jobs as the real economy shrinks, are suffering. For those of you who self-identify as “free-market conservatives”, you should also re-think your support of the current system. “Free markets” are compelled to de-leverage presently, not to re-leverage. A more laissez faire regulatory environment and lower taxes do not address the fundamental problem, which is an abundance of credit that re-distributes wealth from the factors of production to the leveragers.


(emphasis added)

Ever since Nixon defaulted on the Bretton Woods gold clause and ended the last vestiges of the gold standard, the real incomes of wage earners have indeed stagnated. In the past three years they have in fact fallen precipitously. It may be true that the OWS protesters are 'intuiting' this fact, and that the Fed's money printing is only helping the banks, but 'intuiting' this is not enough. Brodsky says we should not 'patronize' the protesters, and to some extent we agree. Alas, we should nonetheless point out the economic and conceptual errors of their concrete demands. They would replace the inequitable system we have now with yet another, possibly even more inequitable and certainly quite authoritarian system. They are not only gathered to protest the existing authoritarian state-capitalistic (or if you will, fascistic) system – the are gathered with a concrete list of demand that amounts to the desire to impose an even more authoritarian system of a more socialistic bent – one that would certainly do absolutely nothing to improve the real wages of wage earners (note in this context the excerpt by Ludwig von Mises above. Raising the nominal minimum wage won't make wage earners richer in terms of the goods and services this wage will eventually command. It will only impoverish them further).

The protesters have meanwhile met with what appears to be a quite disproportionate and violent reaction by the police – which means they got to experience the workings of the establishment's quasi-militarized enforcement agency up front and close. Whether this will cause them to rethink demands that in turn will rely precisely on such enforcement is questionable. Most revolutionaries simply want to employ the same tactics and methods their enemies use against them. 

In the context of the increasing resemblance of our state-capitalistic system to the system of fascism, we want to point readers to an excellent speech Lew Rockwell held at the recent Doug Casey conference on money. The speech is entitled 'The Fascist Threat' and well worth reading in its entirety. As Rockwell points out,  the welfare statism preferred by the left and the militarism preferred by the right  are  just different sides of the same coin. In the speech he references and amply quotes John T. Flynn, the former progressive who became one of the biggest and most trenchant critics of Roosevelt's 'New Deal'.

Here is how it begins:

“Everyone knows that the term fascist is a pejorative, often used to describe any political position a speaker doesn't like. There isn't anyone around who is willing to stand up and say, 'I'm a fascist; I think fascism is a great social and economic system."

But I submit that if they were honest, the vast majority of politicians, intellectuals, and political activists would have to say just that.

Fascism is the system of government that cartelizes the private sector, centrally plans the economy to subsidize producers, exalts the police state as the source of order, denies fundamental rights and liberties to individuals, and makes the executive state the unlimited master of society.

This describes mainstream politics in America today. And not just in America. It's true in Europe, too. It is so much part of the mainstream that it is hardly noticed any more.

It is true that fascism has no overarching theoretical apparatus. There is no grand theorist like Marx. That makes it no less real and distinct as a social, economic, and political system. Fascism also thrives as a distinct style of social and economic management. And it is as much or more of a threat to civilization than full-blown socialism. This is because its traits are so much a part of life — and have been for so long — that they are nearly invisible to us.

If fascism is invisible to us, it is truly the silent killer. It fastens a huge, violent, lumbering state on the free market that drains its capital and productivity like a deadly parasite on a host. This is why the fascist state has been called the vampire economy. It sucks the economic life out of a nation and brings about a slow death of a once-thriving economy.”

Rockwell appears to have come to the same conclusion that Murray Rothbard once arrived at: there is no middle road. The choice is between the 'total State' or 'total freedom'. Here is the excerpt from the speech where he makes this point:

“It also seems to me that the old-time romance of the classical liberals with the idea of the limited state is gone. It is far more likely today that young people embrace an idea that 50 years ago was thought to be unthinkable: the idea that society is best off without any state at all.

I would mark the rise of anarcho-capitalist theory as the most dramatic intellectual shift in my adult lifetime. Gone is that view of the state as the night watchman that would only guard essential rights, adjudicate disputes, and protect liberty.

This view is woefully naive. The night watchman is the guy with the guns, the legal right to use aggression, the guy who controls all comings and goings, the guy who is perched on top and sees all things. Who is watching him? Who is limiting his power? No one, and this is precisely why he is the very source of society's greatest ills. No constitution, no election, no social contract will check his power.

Indeed, the night watchman has acquired total power. It is he who would be the total state, which Flynn describes as a government that "possesses the power to enact any law or take any measure that seems proper to it." So long as a government, he says, "is clothed with the power to do anything without any limitation on its powers, it is totalitarian. It has total power."

It is no longer a point that we can ignore. The night watchman must be removed and his powers distributed within and among the whole population, and they should be governed by the same forces that bring us all the blessings the material world affords us.

In the end, this is the choice we face: the total state or total freedom. Which will we choose? If we choose the state, we will continue to sink further and further and eventually lose all that we treasure as a civilization. If we choose freedom, we can harness that remarkable power of human cooperation that will enable us to continue to make a better world.


(emphasis added)

To the extent that OWS protests the  system of state capitalism and wants to replace it with freedom, we are certainly sympathetic to it. However, we strenuously oppose demands that would foist an even more authoritarian State on us, even if many commentators think they should be warmly greeted as 'reasonable' and 'brainy' because their leanings are leftist.

Lastly, it will be interesting to see if the Democratic Party will eventually attempt to hijack the OWS movement similarly to the way in which the Republicans have attempted (and partly succeeded) in hijacking the Tea Party movement. From the point of view of the establishment  the arrangement that has basically created a one party state with two faces (one more inclined toward welfare, the other more inclined toward warfare statism) is one that needs to be preserved at all cost. It is far easier to get a new party on the ballots in the allegedly authoritarian Russia of Messrs. Medvedev and Putin than in the 'land of the free', that much is certain. Gerrymandering of electoral districts and enormously high barriers to entry have kept the 'third party threat' at bay for more than a century. So we should look forward to the Democrats eventually trying to incorporate the OWS movement – once this happens, it will probably become a headache for them comparable to the headache the Tea Party has become for the GOP. So there will at least be something to look forward to.


In the meantime it has been pointed out to us that OWS is distancing itself (sort of) from the list of published demands. This retraction was added to the movement's site:
Admin note: This is not an official list of demands. This is a forum post submitted by a single user and hyped by irresponsible news/commentary agencies like Fox News and This content was not published by the collective, nor was it ever proposed or agreed to on a consensus basis with the NYC General Assembly. There is NO official list of demands.
Well, that's certainly a relief. Perhaps the fact that this list of 'unofficial demands' has received the criticism it so roundly deserves means that the eventually forthcoming demands will be more reasonable. We will wait and see about that. In the meantime, our critique of the demands stands, regardless of who is making them. It is somewhat deplorable that  FOX and are named in the same breath, but we would point out that no-one has 'hyped' the list of demands. You OWS guys posted them to your own web site after all, whether it was done by the 'collective' (ghastly word) is only marginally relevant in this context – if they get posted, they are open to critique.





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14 Responses to “The ‘Occupy Wall Street’ Protests”

  • pawel-l:

    You wrote:
    “We tend to think that there is in fact a kind of ‘feedback loop’ at work: once a secular bust is underway, falling stock prices cause a change peoples’ attitudes, and the change in attitudes in turn causes stock prices to decline further. ”

    But what stop further decline and what it start ?
    It still doesn’t explain casuality…

    • Pawel, this is correct – it does not explain the causality that puts in place the turning points, but this is a topic that has been discussed in previous articles. The underlying causes of boom-bust sequences are a regularly revisited theme in these pages, and will certainly come up again in future articles.

  • straw_man:

    As younkint has pointed out, OWS has no specific list of demands. It’s very much intentional. They, and I, believe the system is too corrupt to effect any sort of meaningful change. If they made demands to those in power, it would suggest those in power would, or even could, do something about it.

    • This is a good point, thanks for bringing it up. This way of thinking has my full support. For instance, I have not been voting for nearly two decades, as I refuse to legitimize the system with my vote. Last time I voted in an election was in 1994 in South Africa, as I wanted to help lowering the amount of votes the ANC would get by voting for the libertarian, pro-free market Democratic Alliance.

  • First of all, it is the upbeat social mood that causes the bearish social mood. To put a cause on something that is merely a cycle is out of the question. The high creates the platform for the low.

    Second, the OWS movement is a group of pure and simple economic idiots. I am not sure the paper dollar would have ever had any worth if not for its predecessor money. The note is purely bank paper for all debts owed by the bank and to it. The decree “This note is legal tender for all debts public and private” is all that ever gave the paper value. That and the international gold exchange. The cancellation of debts would deem the paper to have no value at all, not to mention private contracts would no longer exist. Then minimum wage would be nothing.

  • amun1:

    I haven’t taken the time to study the OWS movement, but I’m not hopeful that they’ll have any useful suggestions for improving our economy. We’ve been subjected to media endorsed statism for so long that when something breaks, the populist response is generally to call for a government fix.

    I’d be shocked if OWS put forth an official platform that recognized the regulatory prowess of market discipline. Yes, Wall Street did some corrupt, stupid, dangerous things over the last several decades, contributing to a debt crisis that is nowhere near complete. The populist response I expect from OWS is, “Wall Street caused a problem, therefore we need more government regulation and taxing of Wall Street.”

    Few ever consider that without government bailouts, the market would have “regulated” risk quite adequately and a large chunk of those responsible for the problem would be among the unemployed today, considerably poorer in the process. The American public would have learned that savings is not the same as risk capital, instead we’re being forced to view savings as risk capital. Yes, systemic damage would have been done if widespread defaults had been permitted, but the government bailouts will end up doing more systemic damage, and new regulation will further impede an economy that already struggles under the inefficiency and corruption of the old regulation.

    We’ve lost our ability to demand that government step back and respect freedom above all else; the escalating intervention in this crisis is proof beyond a shadow of a doubt. I almost wish that I had no historical perspective because this tale does not end well.

    • “We’ve lost our ability to demand that government step back and respect freedom above all else; the escalating intervention in this crisis is proof beyond a shadow of a doubt.”

      I completely agree, and it is precisely my fear of this ‘government must fix it’ reflex that has caused my to write such an extensive comment. I also share your apprehension – history indeed suggests that these things rarely end well. Alas, there is one glimmer of hope – we have the internet. As the Daily Bell often states, it is akin to Gutenberg’s invention of the printing press. It is no longer possible to keep the ‘dangerous ideas’ about freedom and correct economic science bottled up.

  • younkint:

    Regarding the “list of demands,” I fail to understand how you can write about these “demands” when the OWS site (your own link) has this disclaimer is posted directly above this list:

    “Admin note: This is not an official list of demands. This is a forum post submitted by a single user and hyped by irresponsible news/commentary agencies like Fox News and This content was not published by the collective, nor was it ever proposed or agreed to on a consensus basis with the NYC General Assembly. There is NO official list of demands.”

    So, while you’ve presented a very good discussion of “OWS demands,” I rather think you’re chasing shadows.

    Every OWS protester I have spoken with vehemently denies the existence of any official OWS “demands.” Rather, they emphasize to me that such a list would allow easy marginalization of the movement with the mass media using the standard left vs right arguments in an attempt to bracket them. I can see their point. If the “demands” are as jello, then they cannot be “nailed to a tree.”

    Perhaps they OWS folks were paying attention when the Tea Party was being co-opted by the far right.

    • Possibly that is the case. The disclaimer was pointed out to me, and I have in the meantime added an addendum to the post to acknowledge this fact (when I originally looked at the list of demands I didn’t notice the disclaimer – they either appended it later or I overlooked it, I can not say for sure).
      This does not alter the substance of my critique of the demands such as they stand however. They were posted on the OWS web site, and thereby are fair game for criticism.
      I did mention in my post that “Of course these may not speak for everyone involved. In fact, we rather doubt it – it (OWS) is probably too broad a church.” – I wrote this without knowledge of the disclaimer.
      Note, I am substantially in agreement with the idea of protest against the system such as it is. Alas, I simply do not believe that the force of government should be applied to solve the problem. I am simply pro freedom. The famous motto of Lew Rockwell’s site applies to this site 100% as well: ‘anti-war, anti-state, pro-free market’.
      Naturally, my understanding of what constitutes a free market differs greatly from the Orwellian distortions of this idea transported in the corporatist media.
      Let me lastly say this: I am not out to disparage the protesters, even though that might be the superficial impression created by this critique. I am trying to point out in which direction error lies – in the hope that this will be picked up, in a positive manner.
      I don’t want to see Marx resurrected just because we all agree that the fascistic State-capitalistic system needs to be changed.

      • Andrew Judd:

        If the preceeding comment is true why does your text read:

        “As it were, a list of thirteen proposed demands has been drawn up by the movement in the meantime, which can be reviewed here. Of course these may not speak for everyone involved. In fact, we rather doubt it – it is probably too broad a church. Alas, the demands have been listed by the movement’s main organizers.

        These are the demands: ”

        Most of us dont have the time or even the desire to read each post like we are lawyers to determine what is meant. If you tell me the protest organisers have these demands then i assume given the quality of the work you do here that it is true.

        Please change your text. What justification have you for saying what you said and then defending it?

        • Hi Andrew,

          I did post an addendum showing that they have put up a disclaimer, but I agree that the text should be altered to make this clear from the outset (at the time I wrote this, I mistakenly thought that this list of demands was an ‘official’ statement). Anyway, I will see to it that the text is edited to the effect of making this more clear. Also, as I said, I will on occasion post an update now that there has been an opportunity to observe the protest for a while and get to hear more from the participants.
          In the meantime, see it as a critique of the demands regardless of who is making them.

          • Andrew Judd:


            I came back to this page after seeing the Scott Olsen videos

            Misean views are unlikely to win hearts and minds where most people want to see more community rather than more selfish individualism.

            The elite need to realise that the majority – who allow them to have their powers – dont like what they are doing and want changes.

            I dont see that an intellectually coherent view is required for a person to protest at the excessive wealth held by so few and if takes economic morons with petrol bombs to change that then so be it.

  • HS:

    You have not been fair in your portrait of the movement. Maybe because you have not mingled with the crowd? There are no leaders and many contribute. The contributions included proposed demands which are vetted by readers and in many cases changed or struck down. If you walk through the crowd you will find some general themes. Stop foreign wars. Stop the erosion of civil liberties and the expansion of the police state. Reign in the Federal Reserve. Hold Wall Street accountable.

    He leans to the left but a good interview never then less

    • Hi HS,

      I realize that my focus on the list of (unofficial) demands may not do the movement full justice. See also me reply to younkint in this context. I will continue to observe what happens and will on occasion write an update incorporating these observations. Certainly the list of things you mention (Stop foreign wars. Stop the erosion of civil liberties and the expansion of the police state. Reign in the Federal Reserve. Hold Wall Street accountable) are all things I would fully approve of.
      Let me emphasize that this critique is not to be misunderstood as shilling for the corporatist State – on the contrary, its aim is to point out which direction would – imo – be the wrong one to move toward. I could only go by what information was accessible to me (I admittedly have not moved through the crowd) and my criticism was based on that.
      As to the Chris Hedges interview, which I have just seen (thanks for including the link) – I broadly agree with most, in fact almost all, of what he says, except for one thing: at one point he alleges that ‘big business wants a weak government’, implying that government should be strengthened vis-a-vis big business. I find this epiphany slightly bewildering considering that he for example acknowledges a few minutes later that ‘there is absolutely no difference between Obama and Bush’. The reality of the situation is that big business wants a strong and merciless government. It is in bed with government after all. It wants government to abridge economic and individual freedom so as to erect high barriers of entry for undercapitalized challengers to its dominance. It is not interested in ‘weak’ government – it is interested in a strong government that does its bidding, and vice versa the government is interested in having the big corporations doing its bidding in turn (nowhere is this more obvious than in the corporate mass-media Hedges rightly disdains).
      This is why I am so adamant that the solution can not be a clamor for more government coercion, regardless of whom it is aimed at.

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